JAMAICA: AUGUST ECONOMIC REVIEW AND STORM GUSTAV

UNCLAS SECTION 01 OF 03 KINGSTON 000770 SIPDIS SENSITIVE STATE FOR WHA/CAR (ACADIEUX) (VDEPIRRO) WHA/EPSC (MROONEY) SANTO DOMINGO FOR FCS AND FAS TREASURY FOR ERIN NEPHEW E.O. 12958: N/A TAGS: ENRG EAIR AID EINV ECON ETRD IADB IBRD IMF TRSY XL JM SUBJECT: JAMAICA: AUGUST ECONOMIC REVIEW AND STORM GUSTAV REF: A) KINGSTON 761 B) KINGSTON 760 C) KINGSTON 21 D) KINGSTON 755 E) KINGSTON 703 F) KINGSTON 570 G) KINGSTON 726 ¶1. (SBU) SUMMARY: -- Tropical Storm Gustav has damaged infrastructure on the island and caused at least 14 deaths (reftels A and B). Agriculture also sustained damage, mainly in the eastern parishes of Portland, St. Thomas and St Mary. It is too early to accurately estimate the total financial costs of repairs across the island; septel will follow. -- Air Jamaica faces competition from low cost airline Airone Ventures based in Barbados. The Government of Jamaica (GOJ) refused Airone's request in early 2008 for a license to operate out of Kingston (reftel C). -- Edward Wegel accepted the position as CEO of Air Jamaica and assumed formal control on September 1. The airline seeks to maintain its target of being privatized by March 31, 2009, and is expecting a new block of funding from the GOJ. -- Prime Minister Golding hopes to roll out E10 ethanol fuels by the end of September, although gas station owners tell him his timeline is too short. -- Goodyear Tire has partnered with Tropical Battery to serve as its distributor for tires on the island. Goodyear will continue to operate a marketing and administrative office in Kingston to serve its Caribbean customers. -- Governor of the Bank of Jamaica says inflation will likely hit 15-17 percent for the year. He also said there has not been any impact felt in commercial banks as a result of the collapse of several alternative investment schemes. -------------- Tropical Storm Gustav -------------- ¶1. (U) Jamaica was hit with tropical storm Gustav on August 28-29. The Embassy was closed to the public on both days. Initial assessments are still coming in, but as of Sept 3, there are 12 confirmed deaths and seventy-two communities have been affected. The Gleaner newspaper reported that, at its peak, there were more than 2,000 people in storm shelters. The major Hope River Bridge was destroyed; a temporary structure for pedestrian crossing has been erected to connect Kingston to the eastern parish of St. Thomas. Completely rebuilding the bridge could take as long as 24 months. Another major crossing in the Bog Walk Gorge linking Kingston to the North coast was severely damaged in the storm and is closed to traffic. Damage to agriculture was sustained mainly in the eastern parishes of Portland, St. Thomas and St Mary, particularly to banana and plantain crops. ¶2. (U) Prime Minister Bruce Golding appointed Transport and Works Minister Mike Henry as head of a task force to spearhead restoration work to be done across the island. Henry told reporters from the Observer newspaper that JD 8 billion (USD 115 million) is needed to repair roads from damage caused by Gustav. NOTE: It is too early to accurately estimate the total financial costs of repairs across the island; septels to follow. END NOTE. Henry said Cabinet is looking into potential funding sources, such as multilateral agencies. However, he said he was not very hopeful about receiving an international loan, since Jamaica may not qualify as Gustav was not a category one hurricane. ¶3. (U) Opposition Leader Portia Simpson Miller told reporters from the Observer newspaper on September 1 that she urged the government to declare the eastern tip of Jamaica as a disaster area. She said the response to the storm must be bi-partisan and that the government should make every effort to include other national stakeholders, including the Opposition, in responding to the disaster. -------------- Aviation/ Air Jamaica -------------- ¶4. (SBU) Airone Ventures Limited hopes to be the first low-cost KINGSTON 00000770 002 OF 003 airline to begin service in April 2009 to several regional (Cayman, Grenada, Curacao and Antigua) and then to US destinations including Miami, Orlando and New York. Originally, Airone intended to base its operations out of Jamaica, but was denied a license by the GOJ (reftel A). The GOJ based its refusal on concerns about divesting Air Jamaica and not wanting to create more competition for potential buyers of the beleaguered national carrier. Airone since has moved operations to Barbados; it is not yet clear whether the GOJ will allow Airone to operate service in and out of Kingston. ¶5. (U) Airone was started by Irish entrepreneurs, including cell phone service provider Digicel's vice-chairman Leslie Buckley. Airone will continue to have a close partnership with Digicel, which includes plans to sell airline tickets from Digicel outlets and to use cell phones to provide customers with ticketing and other airline information. The airline will start with two 160-seater Boeing 737-700 planes with the hope of adding 25 new Boeing aircraft. Airone would like to add service between Jamaica and Central and South America. Air Jamaica's non-executive chairman Shirley Williams said in an interview with Sun Herald newspaper that Airone's offers could be a case of predatory pricing, which would cut into Air Jamaica's revenue flows and hinder its ability to stem losses. ¶6. (SBU) Edward Wegel, a U.S. citizen, accepted the position of CEO of the airline, after being selected over Canadian David Ban Miller for the top job. Williams told reporters that the beleaguered airline has administrative expenses that are 43 percent of its total expenses, which is significantly above the industry norm of 15 percent. Williams vowed to take steps to reduce the costs, but conceded that this would require cooperation with the airline's employee unions. Air Jamaica finalized a lease agreement with Turkish airlines in late July to sub-lease two of its A340 aircraft. The planes had been used on Air Jamaica's London route; the lease expenses for the two planes were USD 1.2 million per month. The GOJ still hopes to privatize the airline by March 21, 2009. A contact in Air Jamaica told Econoff the airline will receive another block of funding from the GOJ, which will help finance operations. -------------- Environment/ Renewable Energy/ Energy -------------- ¶7. (U) PM Golding said on August 3 that he wants to push forward on a directive to make E10 (10 percent ethanol) fuel mandatory at all fueling stations by the end of September. Golding faced resistance from gas station owners who said the timeline is unrealistic. Errol Edwards, president of the Jamaica Gasoline Retailers' Association, told The Gleaner newspaper on August 4 that preliminary work, including preparing the islands gas stations, has yet to be done. Golding highlighted the recent partnership with Infinity Bio-Energy of Brazil, saying "new capital is being injected into the sugar industry... and less of the country's sugar cane would be going into sugar and more into ethanol." NOTE: With rising world oil prices, Jamaica is continuing to look at opportunities for renewable energy, including ethanol and biofuels, (reftel D). END NOTE. -------------- Foreign and U.S. Investment -------------- ¶8. (SBU) Goodyear Tire announced on August 31 that Tropical Battery will take over as distributor for its tires on the island. Tropical is a distributor of its own brand of automotive batteries, Castrol motor oil and automotive products. It operates seven company-owned retail stores and supplies products to more than 900 other distributors across Jamaica. Goodyear will continue to operate a marketing and administrative office in Kingston to serve its Caribbean customers. -------------- Budget / Tax Revenue / Debt / Inflation -------------- ¶9. (U) The Bank of Jamaica (BOJ) Governor Derrick Lattibeaudiere told reporters on August 20 that Jamaica appears to be weathering external shocks. Although this assessment was before the damages caused by tropical storm Gustav, he had lowered his growth forecast to 1.2-2.2 percent for the fiscal year 2008-2009. Lattibeaudiere predicted an inflation rate of 15-17 percent for the year, in comparison to 16.8 percent last year. He added that the BOJ's policies are right at the moment in order to contain inflation and maintain a stable currency. He noted, however, "The real problem is that the global economy has not been kind to us...The downward revision from our previous forecast is due to the slowdown in global KINGSTON 00000770 003 OF 003 growth." -------------- Alternative Investment Schemes -------------- ¶10. (SBU) As the collapse of the alternative investment schemes, most notably Olint and Cash Plus, continues to work its way through the economy, the BOJ remains optimistic (reftel G). BOJ Governor Derrick Lattibeaudiere told reporters at his quarterly briefing on Aug 20 that Jamaican banks had not suffered from the collapse of several unregulated investment schemes: "I haven't seen any movement that would cause us concern...we haven't seen that macro-economic impact." He conceded there may be reduction in personal consumption and spending for some Jamaicans. NOTE: Econoff has been told by a few prominent business owners that they are more concerned about the collapse of Olint and fear it will take two to three more months to work through the economy before its impact will be known. END NOTE. HEG